27th Jul 2005 07:05
Prudential PLC27 July 2005 Part 1 Embargo: 7.05am Wednesday 27th July 2005 PRUDENTIAL PLC 2005 INTERIM RESULTS • New business APE of £1,129 million, up 34% on first half 2004 • New business achieved profit of £413 million, up 37%, with Group margin of 37% (HY2004: 36%) • Total achieved profit from continuing operations of £834 million, up 31% on first half 2004 • Total statutory profit from continuing operations of £469 million, up 25% on first half 2004 • Achieved profit shareholders' funds of £9.3 billion (end 2004: £8.8 billion) • Interim dividend of 5.3 pence per share (HY2004: 5.19 pence per share) Commenting, Mark Tucker, Group Chief Executive said: "These results demonstrate the Group is performing well. We have delivereddouble-digit sales growth in all our markets, while maintaining margins at aGroup level. We are taking advantage of our strong presence across the diversemarkets in which we operate. "My priority is to maintain our focus on delivery of superior performance,enhancement of earnings and capital efficiency in order to make the most ofthese opportunities. "As you would expect, I am actively reviewing longer-term trends andopportunities in order to anticipate the changing needs of our customers. Thisattention to the longer-term will help ensure that the actions we take today laythe foundations for an even stronger position for Prudential in the future. Iwill talk more about our evolving thinking with our third quarter new businessfigures in October. "We face a number of challenges, but we remain confident of achieving the growthand return targets we have set out across each of our businesses and we areoptimistic about prospects in the longer-term." Operational highlights: Prudential's UK and Europe insurance operations are making good progress withsales of £541 million on an APE basis, 50% ahead of last year, including thePhoenix Life & Pensions Limited transaction, which increased APE sales by £145million in the period. Excluding this transaction, sales growth was 10%compared to an estimated market growth of 2-3%; and the primary drivers ofgrowth were strong sales of unit-linked bonds (up 100%), individual annuities(up 12%) and bulk annuities (up 67%). The internal rate of return on newbusiness written in the first half was 13%, moving towards our target of 14% bythe end of 2007. New business margin was 30%, although some reduction from the2004 year-end level is still expected for the full year 2005 due to changingproduct mix as Prudential UK builds its shareholder-backed business. In the US, sales increased by 18% on an APE basis with margins improving to 37%(HY 2004:34%) as a result of improved profitability from both variable annuitiesand Guaranteed Investment Contracts (GICs). The acquisition of Life of Georgiawas completed in May and the integration of that business remains on track to becompleted by the end of 2005. Jackson is a low-cost high quality operator thathas shown an ability to innovate in the US market and deliver cash back to theGroup. In Asia, sales growth in the first half of the year was 26% on an APE basis,with particularly strong growth in Korea, India, Indonesia, Malaysia and China.The new business margin was lower at 49% (full year 2004: 54%) primarily due toa combination of changes in country and product mix. In July we announced our9th and 10th licences in China, further strengthening our presence in thisexciting market. Trading conditions in Japan remain tough and we have taken thedecision to impair goodwill in our life insurance business by £95 million inthese results. M&G enjoyed a strong start to the year with net investment in-flows of £1.7billion and growth in underlying profit of 15% to £68 million. Total profit forthe period was £83 million. Egg's first half profit from the core UK business was £13 million after charging£10 million for restructuring costs. We remain focused on optimising theperformance of the Egg business and the value of the Group's investment forPrudential's shareholders. We continue to look to improve capital efficiency and earlier in July we tookadvantage of good market conditions in the US retail market to raise $300million of perpetual subordinated capital securities, which will qualify asGroup regulatory capital. The primary use of the proceeds will be to re-financeour outstanding non-qualifying £150 million bond maturing in 2007. - ENDS - Enquiries: Media Investors / analystsJon Bunn 020 7548 3559 James Matthews 020 7548 3561William Baldwin-Charles 020 7548 3719 Marina Novis 020 7548 3511Joanne Davidson 020 7548 3708 Notes to Editors 1. The comparative International Financial Reporting Standards results areprepared on a "proforma" basis which reflects the estimated effect on the 2004results as if IAS 32, IAS 39 and IFRS 4 had been applied from 1 January 2004 tothe Group's insurance operations together with the discretionary change for thebasis of determining longer-term investment returns, as disclosed on 2 June2005. Achieved profits basis results have been restated for the consequential impactof the adoption of International Financial Reporting Standards at 1 January 2004together with the discretionary change for the basis of determining longer-terminvestment returns, as disclosed on 2 June 2005. The 2004 interim dividend per share has been restated to reflect the bonuselement of the October 2004 rights issue. Period on period percentage increases are stated on a constant exchange ratebasis. 2. There will be a conference call today for wire services at 7.45am (BST)hosted by Mark Tucker, Group Chief Executive and Philip Broadley, Group FinanceDirector. Dial in telephone number: 0800 358 2705. Passcode: 155439#. 3. A presentation to analysts will take place at 9.30am (BST) at Governor'sHouse, Laurence Pountney Hill, London, EC4R 0HH. An audio cast of thepresentation and the presentation slides will be available on the Group'swebsite, www.prudential.co.uk. 4. There will be a conference call for investors and analysts at 2.30pm(BST) hosted by Mark Tucker, Group Chief Executive and Philip Broadley, GroupFinance Director. Please call from the UK +44 (0)20 8609 0205 and from the US +1866 793 4279. Pin number 487687#. A recording of this call will be available forreplay for one week by dialling: +44 (0)20 8609 0289 from the UK or +1 866 6765865 from the US. The conference reference number is 129574. 5. High resolution photographs are available to the media free of charge atwww.newscast.co.uk (+44 (0) 207 608 1000). 6. An interview with Mark Tucker, Group Chief Executive, (in video/audio/text) will be available on www.cantos.comand www.prudential.co.ukfrom 7.05am on27th July 2005. 7. Annual premium equivalent (APE) sales comprise regular premium salesplus one-tenth of single premium insurance sales. 8. New business achieved profits represent the present value of the futurecash flows we expect to receive from new business written in the year, less thecosts of acquiring that new business and the cost of holding the capitalrequired to back it. 9. Total number of Prudential plc shares in issue as at 30th June 2005 was2,383,761,711. 10. Financial Calendar 2005:Ex-dividend date Wednesday 17 August 2005Record date Friday 19 August 2005Q3 new business figures Wednesday 26 October 2005Payment of interim dividend Friday 28 October 2005 11. In addition to the financial statements provided with this press release,additional financial schedules are available on the Group's website atwww.prudential.co.uk *Prudential plc, a company incorporated and with its principal place of businessin the United Kingdom, and its affiliated companies constitute one of theworld's leading financial services groups. It provides insurance and financialservices directly and through its subsidiaries and affiliates throughout theworld. It has been in existence for over 150 years and has £187 billion inassets under management, (as at 31 December 2004). Prudential plc is notaffiliated in any manner with Prudential Financial, Inc, a company whoseprincipal place of business is in the United States of America. Forward-Looking Statements This statement may contain certain "forward-looking statements" with respect tocertain of Prudential's plans and its current goals and expectations relating toits future financial condition, performance, results, strategy and objectives.Statements containing the words "believes", "intends", "expects", "plans","seeks" and "anticipates", and words of similar meaning, are forward-looking.By their nature, all forward-looking statements involve risk and uncertaintybecause they relate to future events and circumstances which are beyondPrudential's control including among other things, UK domestic and globaleconomic and business conditions, market related risks such as fluctuations ininterest rates and exchange rates, and the performance of financial marketsgenerally; the policies and actions of regulatory authorities, the impact ofcompetition, inflation, and deflation; experience in particular with regard tomortality and morbidity trends, lapse rates and policy renewal rates; thetiming, impact and other uncertainties of future acquisitions or combinationswithin relevant industries; and the impact of changes in capital, solvency oraccounting standards, and tax and other legislation and regulations in thejurisdictions in which Prudential and its affiliates operate. This may forexample result in changes to assumptions used for determining results ofoperations or re-estimations of reserves for future policy benefits. As aresult, Prudential's actual future financial condition, performance and resultsmay differ materially from the plans, goals, and expectations set forth inPrudential's forward-looking statements. Prudential undertakes no obligation toupdate the forward-looking statements contained in this statement or any otherforward-looking statements it may make. BUSINESS REVIEW GROUP Results Highlights Half Year Half Year Half Year CER Change RER Change 2005 2004 2004 £m £m £m--------------------------------------------------------------------------------Annual premium 1,129 844 34% 849 33%equivalent (APE)sales Net Investment Flows 2,539 792 221% 777 227%New Business Achieved 413 302 37% 305 35%Profit (NBAP) NBAP Margin 37% 36% 36%Total Achieved profits 834 638 31% 638 31%basis operating profit* - Total International 469 374 25% 375 25%Financial ReportingStandards (IFRS)operating profit *+Achieved profits basis 9.3 7.2 29% 7.2 29%shareholders funds(£bn) -IFRS shareholders 5.0 3.4 47% 3.4 47%funds (£bn) + -------------------------------------------------------------------------------- * Continuing operations - excluding Jackson Federal Bank (JFB) and Egg's Franceand Funds Direct businesses. + The comparative IFRS results shown above are prepared on a 'proforma' basiswhich reflects the estimated effect on the 2004 results as if IAS 32, IAS 39 andIFRS4 had been applied from 1 January 2004 to the Group's insurance operationstogether with the discretionary change for the basis of determining longer-terminvestment returns, as disclosed on 2 June 2005. - Achieved profits basis results have been restated for the consequentialimpact of the adoption of IFRS at 1 January 2004 together with the discretionarychange for the basis of determining longer-term investment returns as disclosedon 2 June 2005. In the Business Review and Financial Review, period-on-period comparisons offinancial performance are on a Constant Exchange Rate (CER) basis, unlessotherwise stated. The Group has had a good first half as illustrated by growth in all the keyperformance measures shown above. This is the result of strong contributionsacross all regions. Growth in APE sales and aggregate new business achieved profit (NBAP) margin of37 per cent led the Group to achieve NBAP growth of 37 per cent. This, togetherwith growth from the fund management operations and the increase in profits fromthe in-force insurance business, driven primarily by the US, led to an increaseof 31 per cent over the first half of 2004 in achieved profits basis operatingprofits. The in-force achieved profit for the half year includes a £132 millioncharge in respect of a persistency assumption change in the UK and a credit inthe US of £141 million reflecting an operating assumption change following priceincreases introduced on two blocks of in-force term life business. Inaggregate, net assumption changes were positive £16 million, with net positiveexperience variances and other items of £39 million. On an international financial reporting standards basis (IFRS), operatingprofits were up 25 per cent on the same period of last year driven primarily bythe growth in profits from the UK and Asian insurance operations. Basic earnings per share on the achieved profits basis for the half year afterminority interests were 21.7 pence for the half year of 2005, compared with arestated figure of 19.8 pence for the prior year. Basic earnings per share,based on total IFRS profit for the half year after minority interests, were 12.7pence, down 1.5 pence from the restated 2004 half year figure on a proformabasis of 14.2 pence primarily reflecting the impairment of purchased goodwillassociated with the Japanese life business. Impact of Currency Movements Prudential has a diverse international mix of businesses with a significantproportion of its profit generated outside the UK. In preparing the Group'sconsolidated accounts, results of overseas operations are converted at rates ofexchange based on the average of the year to date, whilst shareholders' fundsare converted at period-end rates of exchange. Changes in exchange rates from year to year have an impact on the Group'sresults when these are converted into pounds sterling for reporting purposes.In some cases, these exchange rate fluctuations can mask underlying businessperformance. For example, growth in the US total achieved profit basis operatingprofit was 95 per cent at reported exchange rates (RER), compared to 101 percent at CER. Consequently, the Board has for a number of years reviewed the Group'sinternational performance on a CER basis. This basis eliminates the impact fromconversion, the effects of which do not alter the long-term value ofshareholders' interests in the non-UK businesses. In the Business Review and Financial Review, period-on-period comparisons offinancial performance are on a CER basis, unless otherwise stated. INSURANCE UNITED KINGDOM AND EUROPE Half Year Half Year 2005 2004 Change £m £m------------------------------------------------------------------------------APE Sales 541 361 50%NBAP 159 88 81%NBAP Margin* 30% 25%Total Achieved profits basis operating 182 240 (24%)profitTotal IFRS operating profit 187 153 22%------------------------------------------------------------------------------ * excluding APE sales in respect of SAIF DWP rebates Prudential UK and Europe delivered an increase in APE sales of 50 per centrelative to the same period in 2004. This includes APE sales of £145 millionfrom the acquisition of the portfolio of in-force pension annuities from PhoenixLife & Pensions ("PLP"), a subsidiary of Resolution Life Ltd, in June 2005.Excluding the PLP transaction, sales increased by 10 per cent. This comparesfavourably with the total UK medium to long-term savings market growth of 2 percent in the first quarter (based on data from the Association of BritishInsurers). NBAP increased by 81 per cent, reflecting the growth in sales volumes and anincrease in the NBAP margin to 30 per cent from 25 per cent at the half year2004 (full-year 2004: 27 per cent). Total achieved profits basis operatingprofit decreased 24 per cent to £182 million primarily due to a £132 millioncharge relating to an assumption change in respect of persistency. Increasedannuity sales contributed to the 22 per cent increase in IFRS operating profitto £187 million. The £132 million charge reflects a strengthening of persistency assumptionsacross a number of products, primarily in respect of with-profit bonds. Thisassumption change reflects Prudential's current experience and, post tax,represents 3 per cent of the overall embedded value of the UK business.Prudential continues actively to manage the conservation of the in-force book. The primary drivers of growth for the UK business were strong sales ofunit-linked bonds, bulk annuities and individual annuities. APE sales ofunit-linked bonds doubled compared with the same period last year to £36million, reflecting Prudential UK's progress in the IFA unit-linked bond market.Bulk annuity sales increased by 67 per cent to £35 million, driven by 31 bulkannuity scheme wins (excluding the PLP transaction). Individual annuity saleswere strong across all distribution channels with APE sales of £111 million up12 per cent. In particular, with-profit annuities attracted increased levels ofinterest, with APE sales doubling on half year 2004 levels to £7 million. Corporate pension APE sales fell 14 per cent to £85 million, reflecting thecontraction seen in the corporate pensions market ahead of the change inpensions legislation in April 2006 ('A-Day'). In response to the move away fromdefined benefit schemes to defined contribution schemes in the market,Prudential UK announced an agreement with AON in May to support the launch oftheir new defined contribution (DC) pension solution for employers. APE sales through Prudential's European operations increased 200 per cent to £12million, reflecting growing bond sales through new and existing distributors. In June, Prudential UK added a capital guarantee option to the PruFundInvestment Plan. This guarantee provides capital security combined with thepotential for growth which addresses a primary concern of advisers with low tomedium risk investor clients. The demand for lifetime mortgages is projected to grow significantly over thenext few years and Prudential UK will launch shortly its own lifetime mortgageproduct, the Prudential Property Value Release Plan. Unlike many other lifetimemortgage products currently on the market, this innovative product will allowcustomers much greater flexibility and control over when they draw down fundsand thereby reduce total interest charges over the lifetime of the loan. Prudential UK has made good progress with the new multi-tie networks. Mostrecently, it has been appointed as a provider for Sesame's new regulatedmulti-tie proposition, Sesame Select. Sesame is one of the UK's leadingproviders of support services to 8,150 financial advisers. As a result of thisand other previously announced appointments, Prudential UK is well positioned toincrease its market share in the depolarised marketplace as this develops overthe next couple of years. Prudential UK was appointed to the Barclays multi-tie panel during the firsthalf of 2005 and this went live on 1 June. In addition, Prudential began towrite business in June through its distribution agreements with St James's Placeand National Australia Bank. These will augment growth already being achievedunder the existing agreements with Lloyds TSB, Alliance and Leicester, Pearl andZurich. The With-Profits Fund benefited from a pre-tax investment return of 7.4 per centin the first half of 2005 compared with 3 per cent in the comparable period of2004. Over the last five years (to 30 June 2005), the With-Profits Fund hasdelivered a pre-tax return of 28.9 per cent compared with the return on the FTSEAll Share (Total Return) index over the same period of negative 1.5 per cent.The fund remains strong with an inherited estate estimated to be around £7.3billion as at 30 June 2005, on a deterministic valuation basis, compared withapproximately £6.5 billion at the end of 2004. The PAC long-term fund iscurrently rated AA+ by Standard & Poor's, Aa1 by Moody's and AA+ by FitchRatings. There will be a number of significant changes in the retirement savings marketas a result of the Government pensions reforms due to come into force on'A-Day' in April 2006. These include a single tax regime for pensions, greaterinvestment flexibility for consumers (allowing, for example, residentialproperty to be held within a pension) and increased annual contribution limits.When combined with the increase in charges to stakeholder products announcedlast year and its success in winning positions on multi-ties, this creates anopportunity for Prudential UK to increase its presence in retirement provision.Prudential UK is developing a number of propositions that take advantage of theincreased flexibility and contribution limits created by the pensions reforms.It will launch a series of products, the first of which will be a new personalpension that will be available in advance of A-Day. Market growth in the first half of 2005 is unlikely to be in excess of 5 percent and Prudential UK does not anticipate a significant improvement in thesecond half of the year. Recent trading in certain segments of the UK markethas been difficult and, most notably, competition within the protection andindividual annuity markets intensified in the second quarter. However, weexpect to continue to outperform the market in the second half of the year. Weremain confident that we can achieve overall growth of 10 per cent in 2005. UNITED STATES Half Year Half Year Half Year CER Change RER Change 2005 2004 2004 £m £m £m--------------------------------------------------------------------------------APE sales 275 234 18% 240 15%NBAP 102 79 29% 82 24%NBAP Margin 37% 34% 34%Total Achieved profits 429 213 101% 220 95%basis operating profit*Total IFRS operating 169 151 12% 155 9%profit* -------------------------------------------------------------------------------- * Continuing operations - excluding Jackson Federal Bank (JFB) which was sold inOctober 2004 Period-on-period comparisons of financial performance are on a Constant ExchangeRate (CER) basis, unless otherwise stated Jackson National Life (JNL) continued to focus on the value of new productsales, rather than top line growth. APE sales for the first half of 2005 were 18per cent higher than prior year, new business achieved profits were up 29 percent and IFRS operating profits were up 12 per cent over the first half of 2004. At the 2005 half year, JNL had over $65 billion in assets under management. Ofthis, $15 billion related to variable annuity assets an increase of $1.6 billioncompared to 2004 year-end, further diversifying JNL's earnings towards fee-basedincome. On 18 May 2005 JNL completed the purchase of Life Insurance Company of Georgiafrom ING at a purchase price of £142 million, subject to post-closingadjustments. Following completion, JNL began to move Life Insurance Company ofGeorgia policies onto its low cost and scaleable platform. Full integration ofthe business remains on track to be completed by year-end 2005. The 18 per cent growth in APE sales to £275 million during the first half of2005 was driven by stronger variable annuity (VA), fixed index annuity (FIA) andinstitutional sales, partially offset by decreased sales of fixed annuities.Total APE retail sales for the first half of 2005 of £195 million were up 11 percent on prior year. New business achieved profit of £102 million was 29 per cent above the prioryear, reflecting both an 18 per cent increase in APE sales and an increase inmargin from 34 per cent to 37 per cent half year on half year. The increase inmargin primarily reflects increased profitability from the re-pricing in May2004 of JNL's unbundled VA 'Perspective II' and increased GIC profitability dueto longer average maturities available on contracts sold in the first half of2005. In addition, there has been an increase in the spread assumption for FIA. JNL generated record VA APE sales of £118 million during the first half of theyear, up 21 per cent on the prior year, in a market that JNL believes was weakerthan last year. This reflects the company's innovative product offering anddistribution capabilities. In the three months to 31 March 2005, JNL ranked 2ndin VA net flows and 13th in total VA new sales. JNL's 'Perspective II' productranked 1st overall in VA product net flows and 3rd in total VA new sales. JNLwas one of only five of the top 25 VA providers in the US to increase VA assetsfrom year-end 2004 to the end of the first quarter 2005. The rate of take up ofthe fixed account option remained low, with 25 per cent of variable annuitypremium going into fixed accounts during the first half of 2005 compared with 26per cent for the first half of 2004. Fixed annuity APE sales of £41 million were down 27 per cent on prior year,reflecting the flattened yield curve in the US which has made rates on shortterm certificates of deposit more attractive to customers. As a result of thefall in volumes, JNL ranked 11th in total individual fixed annuity sales at theend of the first quarter of 2005, down from 4th during the same period in theprior year. Lower fixed annuity sales were partially offset by fixed index annuity APE salesof £30 million, an increase of 100 per cent over the prior year, reflectingcustomers' increasing preference when selecting fixed products to have thepotential for higher returns linked to equity index performance. JNL hasbenefited from its approach to educating broker dealers about this complexproduct, while at the same time offering lower commissions and investing thesavings into providing value to the policyholders through enhanced benefits. Institutional APE sales for the first half of 2005 were £80 million, up 38 percent on prior year results. JNL took advantage of several attractive issuanceopportunities during the first half of 2005. APE sales of institutional productsin the second half of 2005 are anticipated to be in the region of £25 million. Total achieved profits basis operating profit at the half year 2005 was £429million compared to £213 million in the prior year. This primarily reflects theincrease in new business achieved profits, an operating assumption changefollowing price increases introduced on two older, less profitable books of termlife business and a favourable spread variance. The growth in IFRS operating profit of 12 per cent from the prior year primarilyreflects an increase in spread and fee income over the first half of 2004,together with an increase in profits from Prudential's US fund manager, PPMA.The 2004 half year result benefited from two one-off items, a favourable legalsettlement of £28 million (£20 million after related change to amortisation ofdeferred acquisition costs) and a positive £7 million adjustment arising fromthe adoption of SOP 03-01 'Accounting and Reporting by Insurance Enterprises forCertain Non-traditional Long Duration Contracts and for Separate Accounts'. JNL remains well positioned for the remainder of the year to deliver sales attwice the expected US market growth rate of 4 per cent, since current marketconditions continue to favour those financial services companies that have arange of variable and fixed annuity product offerings, a strongrelationship-based distribution model, low cost structure and the ability todeliver high quality service. ASIA Half Year Half Year Half Year CER Change RER Change 2005 2004 2004 £m £m £m--------------------------------------------------------------------------------APE sales 313 249 26% 248 26%NBAP 152 135 13% 135 13%NBAP Margin 49% 54% 54%Total Achieved profits 226 174 30% 169 34%basis operating profit*Total IFRS operating 116 59 97% 58 100%profit* -------------------------------------------------------------------------------- *excluding the fund management business, development and Asia regional headoffice expenses Period-on-period comparisons of financial performance are on a Constant ExchangeRate (CER) basis, unless otherwise stated Prudential's well diversified portfolio of life insurance businesses in Asiahave shown strong growth with first half year sales on an APE basis of £313million, up 26 per cent on the same period in 2004 with 87 per cent of APE salesgenerated by more profitable regular premium products. Sales in the first halfof 2005 primarily reflect the continued strong growth of its Korean and Indianoperations combined with solid performances from the more established operationsof Malaysia, Singapore and Hong Kong. The businesses in Indonesia and China alsoshowed very good sales growth. Total NBAP increased by 13 per cent over the first half of 2004 to £152 million,reflecting the sales increase offset by NBAP margins that decreased from 54 percent for the full year 2004 to 49 per cent. This represents a change ingeographic mix (reduction of 2 percentage points) largely due to a higherproportion of new business from the relatively lower margin markets of Korea andIndia; a change of product mix (reduction of 1 percentage point) with anincreased proportion of lower margin products in Taiwan and Singapore; and achange of assumptions (reduction of 2 percentage points), primarily driven bylow interest rates in Taiwan. In-force operating profits in Asia of £74 million for the first half of 2005represent an increase of 90 per cent over the same period for 2004 and IFRSprofits increased to £116 million from £59 million in 2004 including acontribution of £44 million from exceptional items. Prudential's Korean Life operation has rapidly become a material contributor toAPE sales with first half sales of £60 million, an increase of 82 per cent overthe same period in 2004. This increase clearly demonstrates the flexibility ofits multi-channel distribution model, with in-house financial consultants andgeneral agents currently the dominant distribution channels supported bycontributions from direct marketing and bancassurance. Since its launch in 2004,the proportion of the higher margin variable universal life product sold hasincreased steadily such that it now accounts for 80 per cent of Korea's APEsales. Prudential's Indian life insurance joint venture with ICICI remains firmly inposition as the number one private sector life insurance company as reported inthe Insurance Regulatory and Development Authority journal in India.Prudential's 26 per cent share of the joint venture's half year APE sales was£27 million, up 59 per cent over the first half of 2004. The business continuesto extend its geographic reach in India with 74 branches to date and has grownits tied agency force by 16 per cent this year. Prudential intends to increaseits equity stake in this operation when regulations permit. However, there isno clear indication when this will be. The life insurance joint venture with CITIC in China is still relatively smallin terms of new business volumes but is growing rapidly with a 67 per centincrease in APE sales to £10 million compared to the first half of 2004 of £6million. Progress continues to be made in establishing CITIC Prudential as theleading foreign joint venture life insurer in terms of geographic coverage, with6 new city licences added during 2005 bringing the total to 10. In addition,the operation also has a national licence for the sale of group life insurance. Despite some slowdown in the market for regular premium unit-linked products,Prudential's Singapore life operation delivered APE sales growth of 17 per centover 2004, driven in part by the new partnership agreement with Maybank. Earlierthis year, the business also entered into a distribution agreement withSingPost. In Hong Kong Prudential's long-term partnership with StandardChartered Bank helped drive good growth against a competitive market generating£50 million of sales, up 11 per cent over the same period last year. In Malaysia, Prudential's life business has market leading agent productivityand a popular range of unit-linked products. APE sales of £29 million were up 38per cent compared to the first half 2004. The Indonesian operation posted record quarterly APE sales of £11 million,exceeding their previous high achieved in the first quarter of 2004 by 22 percent, to generate £21 million in APE sales in the first half of 2005, 40 percent above the first half of 2004. The Taiwanese life operation continues to face a challenging environment offalling interest rates, which are now at historic lows. First half 2005 APEsales of £62 million are in line with last year. Second quarter APE sales inTaiwan increased 52 per cent over the first quarter following the launch of apensions orientated linked product with a higher investment content. Total APE sales contribution from the remaining four markets of Japan, thePhilippines, Thailand and Vietnam are collectively down 5 per cent, primarilydue to a slow market in Vietnam. As reported previously, the development of theJapanese life business has been slower than expected and to reflect this therehas been an impairment of £95 million of the purchased goodwill associated withthis business. In March the first stage of Prudential's Asian regional operations centre waslaunched. Located in Malaysia, Prudential Services will leverage Prudential'sincreasing scale and presence in Asia to drive operating synergies andefficiencies. The shared services operation and call centre will initiallyservice the Singapore and Malaysia life businesses. Prudential's Asia strategy remains firmly in place and its focus continues to beon long term, profitable and sustainable growth. Fund Management M&G Half Year Half Year 2005 2004 Change £m £m--------------------------------------------------------------------------------Gross investment flows 3,579 2,177 64%Net Investment flows 1,680 (90)Underlying profits before PRF 68 59 15%Total IFRS operating profit 83 79 5%-------------------------------------------------------------------------------- M&G delivered underlying profits (excluding performance related fees (PRFs)) of£68 million in the first half of 2005, a 15 per cent increase compared to thesame period last year. Excluding the £7 million of one-off items in the 2004result, underlying operating profits were 31 per cent higher than last year.This reflects M&G's strengths in retail fund management, institutional fixedincome, pooled life and pension funds, property and private finance, allied witha continued focus on cost control. Total operating profit of £83 million was 5 per cent higher than 2004, withgrowth at the underlying level being offset by lower PRFs. It should be notedthat although the £15 million of PRFs earned in the first half of 2005 is downcompared to £20 million in 2004, it still represents an unusually strong result,driven as before primarily by private equity realisations by PPM Capital. Incomefrom PRFs is expected to be significantly lower in future years. M&G delivered record gross retail fund inflows of £1.6 billion in the first halfof 2005, more than double the previous year. The core UK operation producedgross fund inflows up 48 per cent on last year at £686 million as a result ofits retail brand presence, good fund performance and diversified product rangein equities, fixed income and property. Robust growth was also generated in theinternational businesses, with gross inflows more than tripling on last year.Total net retail fund inflows of £448 million were six times those of half year2004. M&G's institutional businesses delivered gross fund inflows of £2.0 billion, up43 per cent on last year. This was boosted by a one-off contribution of £967million from Prudential Property Investment Managers (PruPIM), related to thetransfer of 50 per cent of Prudential's economic interests in three UK shoppingcentres into new external vehicles which PruPIM continues to manage. M&G'sscale and strong market position in fixed income and private finance wasdemonstrated by the successful launch to external investors of twoCollateralised Debt Obligations (CDOs) of €445 million collectively. This bringsthe total number of CDOs launched since 2001 to eight. These strong gross flowswere also reflected in net institutional sales of £1.2 billion in the first halfof 2005, compared to a net outflow of £164 million in the first half of 2004. Asia Fund Management Half Year Half Year Half Year CER Change RER Change 2005 2004 2004 £m £m £m--------------------------------------------------------------------------------Net investment flows 698 697 0% 677 3%Total IFRS operating 2 10 (80%) 10 (80%)profit* -------------------------------------------------------------------------------- * IFRS operating profit in 2005 was £12 million, offset by £10 million ofexceptional charges related to bond funds in Taiwan Period-on-period comparisons of financial performance are on a Constant ExchangeRate (CER) basis, unless otherwise stated Funds under management in Asia at the half year increased by 33 per cent to £9.7billion over the year-end 2004 with net inflows of £698 million in line with thefirst half of 2004. The fund management business continues to expand itsgeographic presence with the launch of a new operation in Vietnam. Both assetmanagement businesses in Japan and Korea delivered strong results and in May2005 Morningstar ranked PCA Asset Management Japan as one of the five fastestgrowing fund management businesses in Japan for the six months to 31 March 2005. The Prudential ICICI Asset Management Company joint venture in India hasincreased its funds under management to US$4 billion. Earlier this yearPrudential's joint venture partner agreed to purchase an additional 6 per centshare of Prudential ICICI Asset Management Company. The transaction is expectedto complete later this year and will bring ICICI Group's share to 51 per centwhile Prudential will hold 49 per cent. The Taiwanese business has experienced a substantial decline in funds undermanagement over the last year due to high levels of market redemptions in bondfunds, particularly foreign managed funds. Prudential Taiwan restructured itsbond portfolios to enhance liquidity during the first half of 2005 and this hasgiven rise to a one-off exceptional charge of £10 million to operating profits. BANKING Egg Half Year Half Year 2005 2004 ** Change £m £m--------------------------------------------------------------------------------IFRS Operating Profit from ContinuingOperations *UK banking business 23 36 (36%)Other (10) (3) (233%)-------------------------------------------------------------------------------- 13 33 (61%)-------------------------------------------------------------------------------- Net interest income * 146 145 1%--------------------------------------------------------------------------------Non-interest income * 105 94 12%-------------------------------------------------------------------------------- * Continuing operations - excludes Egg France and Funds Direct. ** 2004 comparatives restated to IFRS basis, except for adjustments for IAS 32and IAS 39 which have been adopted from 1 January 2005. Egg's core UK banking operation delivered a profit of £23 million for the firsthalf of 2005, compared with £36 million for the same period in 2004. Revenuesfrom the UK business grew five per cent over the same period in 2004, primarilyreflecting the increased revenues earned from the credit card business. Thecredit card business has performed well, with balance growth of five per centfor the first half of 2005, compared with two per cent for the industry. The growth in revenue from the card business was partly offset by reducedcommission income from sales of associated insurances on loans. This reflectsthat, as planned, personal loan disbursements have slowed down in the first halfof 2005 from the record level achieved in 2004 following Egg's decision totighten its lending criteria. In comparison with the same period in 2004, the impairment charge on loans andadvances to customers also increased in the first half of 2005, driven by thegrowth in unsecured lending balances and the stage of life cycle of the book.Credit quality remains strong and the impairment charge for the second quarterof 2005 reduced slightly from the previous quarter. Egg's total profit from continuing operations for the first half of 2005 wasimpacted by a £10 million restructuring charge. This process was completed inthe second quarter of 2005. The aim of the reorganisation was to align the costbase with Egg's strategy to focus on its core UK business with estimated annualsavings of £12 million. The exit process from France was completed in the first quarter this year. Thetotal costs incurred were lower than the provision established in July 2004 and£5 million of this was released in the first quarter. During 2005, Egg closedFunds Direct, its investment wrap platform business and provided for an exitcharge of £3 million. FINANCIAL REVIEW SALES AND FUNDS UNDER MANAGEMENT Prudential delivered strong sales growth during the first half of 2005 withtotal new insurance sales up 45 per cent to £8 billion at constant exchangerates (CER). This resulted in insurance sales of £1.1 billion on the annualpremium equivalent (APE) basis, an increase of 34 per cent on 2004. At reportedexchange rates (RER), APE sales were up 33 per cent on the half year of 2004. Total gross investment sales were £13.2 billion, up 8 per cent on 2004 at CER.Net investment sales of £2.5 billion were over three times net investment salesin 2004 at CER. Strong gross inflows across a number of markets were offset bythe high level of redemptions in Taiwan. Total investment funds under management increased by 12 per cent at RER from£37.1 billion at 31 December 2004, to £41.7 billion at 30 June 2005, reflectingnet investment flows of £2.5 billion and net market and other movements of £2.1billion. At 30 June 2005, funds under management were £214 billion, an increase of 9 percent from 2004 year end at RER, as a result of strong inflows and favourablemarket movements. ACHIEVED PROFITS BASIS OPERATING PROFIT Total achieved basis operating profit from continuing operations of £834 millionwas up 31 per cent at both CER and RER reflecting strong growth fromPrudential's insurance and fund management businesses. Half Year Half Year Half Year CER Change RER Change 2005 2004* 2004* £m £m £m--------------------------------------------------------------------------------NBAP 413 302 37% 305 35%Business in-force 412 327 26% 326 26%--------------------------------------------------------------------------------Long-term business 825 629 31% 631 31%Asia development (8) (9) 11% (10) 20%expensesOther operating 17 18 6% 17 13%results --------------------------------------------------------------------------------Total 834 638 31% 638 31%-------------------------------------------------------------------------------- *Achieved profits basis results have been restated for the consequential impactof the adoption of International Financial Reporting Standards at 1 January 2004together with the discretionary change for the basis of determining longer-terminvestment returns as disclosed on 2 June 2005. Group NBAP from long-term business of £413 million was up 37 per cent on theprior year at CER, reflecting strong growth across all regions: up 81 per centin the UK, up 29 per cent in the US and up 13 per cent in Asia. The Group'saverage new business margin increased from 36 per cent for the first half of2004 to 37 per cent for the first half of 2005. During the first half of 2004, 62 per cent of the Group's NBAP was generatedfrom its overseas operations. Total in-force achieved profit of £412 million was up 26 per cent on 2004 atboth CER and RER. This resulted from strong growth in the US and Asianoperations offset by a fall in the UK. UK and Europe Insurance Operations Achieved profits basis operating profit of £182 million was down 24 per cent on2004. New business achieved profit of £159 million was up 81 per cent on the firsthalf of 2004, reflecting both a 50 per cent increase in APE sales and anincrease in NBAP margin from 25 per cent in 2004 to 30 per cent in 2005. The increase in margin primarily reflects a favourable sales mix and thepositive effect of economic assumptions offset by lower annuity yield margins.The favourable sales mix reflects the increased annuity sales, including thePhoenix Life and Pensions bulk annuity transaction and lower sales of lessprofitable pensions offset by increased unit-linked bond sales. Notwithstandingthe current performance achieved in the first half of 2005, some reduction inoverall margin from the 2004 year end level is still expected for the full-year2005 due to changing product mix as Prudential UK builds its shareholder-backedbusiness. The weighted average post-tax Internal Rate of Return (IRR) on the capitalallocated to new business growth in the UK for the first half of 2005 was 13 percent. This remains in line with the target of 14 per cent for the 2007financial year. In-force profit of £23 million was 85 per cent lower than the first half of 2004reflecting a £132 million charge in relation to an assumption change. The £132 million charge reflects a strengthening of persistency assumptionsacross a number of products, primarily in respect of with-profits bonds. In thecase of PruBond, which accounts for a significant proportion of the assumptionchange, Prudential expected surrenders to fall after the bonus declaration inFebruary 2005. In the event, following the bonus declaration, customers havecontinued to surrender their policies leading to a strengthening of theassumption by 40 per cent. The assumption changes reflect Prudential's currentexperience and, post tax, represent 3 per cent of the overall embedded value ofthe UK business. Prudential continues actively to manage the conservation ofthe in-force book. US Operations In the US, achieved operating profit from long-term operations was £417 million,up 94 per cent at CER and up 88 per cent at RER from the prior year. At CER, new business achieved profit increased by 29 per cent to £102 million,reflecting an 18 per cent increase in APE sales and an increase in margin from34 per cent to 37 per cent at the half year. At RER, NBAP was up 24 per cent.The increase in margin reflects increased profitability from the re-pricing inMay 2004 of JNL's unbundled VA 'Perspective II', and increased GIC profitabilitydue to longer average maturities available on contracts sold in the first halfof 2005. In addition there has been an increase in spread assumption for FixedIndex Annuities, from the long-term assumption of 175bps to 190bps reflectingthe spread being achieved. For JNL, the average IRR on new business in the first half of 2005 was 13 percent. At CER, the in-force profit for the half year increased significantly from £136million in the prior year to £315 million. At RER, in-force profit increasedfrom £140 million to £315 million. This increase is primarily due to afavourable spread variance of £44 million and an operating assumption changefollowing price increases introduced on two older books of term life business(£141 million). As a discretionary change of accounting policy, implemented at the same time asthe adoption of IFRS, the Group has replaced the previous basis of five yearaveraging of gains and losses on bonds with a method that more closely reflectslonger-term returns. On the new basis, longer-term returns on fixed income securities comprise twoelements. The first element is a risk margin reserve (RMR) charge for long-termdefault experience of £27 million for the half year 2005. The present value offuture RMR charges is reflected in the opening embedded value. The secondelement is amortisation of £26 million of interest related realised gains andlosses. These gains and losses are amortised to operating profit over the bonds'original maturities. The excess or deficit of actual realised gains and losses for fixed incomesecurities for the period over these components of longer-term returns isincluded in short-term fluctuations in investment returns as a separatecomponent of total profit for the period. Following this change of policy for JNL's achieved profits basis operatingprofit the component for longer-term returns for fixed income securities isexpected in the future to be a more stable feature than on the previous basis,which was affected by the volatility of realised gains and losses over a fiveyear period. Total profit, including actual investment returns, is unaffectedby the change. Further details of the change of policy are explained in thenotes to the Achieved Profits and IFRS basis results. In the six months to 30June 2005, JNL experienced a net realised gain of £1 million on its corporatebond portfolio. This is reflected in total achieved basis profit before tax. Asia Operations Achieved profits basis operating profit from long-term operations (excludingdevelopment and regional head office costs) was £226 million for the half year,up 30 per cent at CER and 34 per cent at RER on half year 2004. Total NBAP increased by 13 per cent over the first half of 2004 to £152 million,reflecting the sales increase offset by NBAP margins that decreased from 54 percent for the full year of 2004 to 49 per cent. This decrease is driven by achange in geographic mix (reduction of 2 percentage points) largely due to ahigher proportion of new business from the relatively lower margin markets ofKorea and India, a change of product mix (reduction of 1 percentage point) withan increased proportion of lower margin products in Taiwan and Singapore, and achange of assumptions (reduction of 2 percentage points) primarily driven by lowinterest rates in Taiwan. We expect to be able to maintain the average NBAP margins in Asia at or aroundcurrent levels given our planned mix of business in 2005. In-force operating profits in Asia of £74 million for the first half of 2005represent an increase of 90 per cent over the same period for 2004 at CER, whichincluded changes of assumptions. In Asia, IRRs on new business at a country level are targeted to be 10 per centover the country risk discount rate. Risk discount rates vary from 5 to 19 percent depending upon the maturity of the market. These target rates of return areaverage rates and the marginal return on capital on a particular product couldbe above or below the target. Non-insurance Operations M&G M&G's underlying profit before performance related fees (PRFs) was £68 million,an increase of 15 per cent on the first half of 2004. However, adjusting the2004 result for the £7 million of one-off provision releases that were disclosedlast year, profits improved by £16 million or 31 per cent, over the same periodlast year. Underlying profits continue to be driven forward by revenue growthfrom existing and new business lines, including new business flows, highermarket levels in many of the segments in which M&G operates and the ability toextend existing skills and relationships into new markets. This is combinedwith a continuing emphasis on cost control. Total operating profit, including PRF, of £83 million was 5 per cent higher thanin 2004, with strong growth at the underlying level being partly offset by lowerPRFs. In 2005, M&G earned £15 million in PRFs (first half 2004: £20 million),of which £12 million was contributed by PPM Capital (first half 2004: £19million). It should be noted that both years are unusually high reflecting therealisation of a series of profitable investments by PPM Capital. Income fromPRFs is expected to be significantly lower in future years. US broker dealer and fund management businesses The broker dealer and fund management operations reported a total profit of £18million, compared with £9 million in the first half of 2004. This reflects anincrease in profits from PPM America, arising primarily due to a one-off £6million revaluation of an investment vehicle managed by PPMA. Curian Curian provides innovative fee-based separately managed accounts. Curianincurred a loss of £6 million compared to a loss £11 million in the prior year,as the business continues to build scale. Asian fund management business Profit from the Asian fund management operations was £2 million for the halfyear, down 80 per cent from 2004 on CER, primarily reflecting a one-off chargeof £10 million resulting from restructuring of the bond portfolios in Taiwanduring the first half of 2005. Excluding this, operating profit grew by 20 percent. Egg Egg's total continuing operating profit for the first half of 2005 was £13million, compared with £33 million in the same period last year. Impairmentcharges on loans and advances to customers increased in the first half of 2005,driven by the growth in unsecured lending balances and reflecting the stage oflife cycle of the book. Despite the strong revenue from the credit cardbusiness, the revenue generated from the associated insurances on loans werelower than the same period in 2004, reflecting the planned reduction in personalloan disbursements compared to the record level achieved in 2004 following Egg'sdecision to tighten its lending criteria. Egg's total profit was further impacted by a £10 million restructuring charge.The aim of the restructuring was to align the cost base with Egg's strategy tofocus on its core UK business and the estimated annual savings from thisreorganisation are £12 million. Other Asia's development expenses (excluding the regional head office expenses) forthe half year decreased by 11 per cent at CER to £8 million, compared with £9million in 2004. These development expenses primarily relate to repositioningthe insurance operation in Japan. Other net expenditure of £93 million compared to £102 million in 2004 at CER.This reflected an increase in investment return and other income as a result ofthe interest earned on the net proceeds from the 2004 rights issue offset byhigher interest payable and head office costs. Head office costs (including Asiaregional head office costs of £14 million) were £50 million, up £10 million on2004 at CER. The increase mainly reflects the substantial work being undertakenfor the implementation of IFRS, European Embedded Values, Sarbanes Oxley andother regulatory costs. Total Achieved Profits Basis - Result Before Tax for Continuing Operations(Period-on-period comparisons below are based on RER) Total Achieved Profit before tax and minority interests was £816 million up 26per cent from £650 million in the first half of 2004. This reflects an increasein operating profit from £638 million to £834 million together with a favourablemovement of £381 million in short-term fluctuations in investment returns fromnegative £76 million to positive £305 million. This is offset by a negativemovement of £241 million due to changes in economic assumptions; an adverseRelated Shares:
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